Year-End Tax Planning for Individuals

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2018 takes place against the backdrop of new laws that make major changes in the tax rules for individuals and businesses.For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit and a watered-down alternative minimum tax (AMT) among many other changes. For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are on business interest deductions, and significantly liberalized expensing and depreciation rules. And there’s a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

We have compiled a list of actions based on current tax rules
that may help you save tax dollars if you act before year-end. We can narrow down
the specific actions that you can take once we meet with you to tailor a
particular plan. In the meantime, please review the following list and contact
us at your earliest convenience.

Year-End Tax Planning
for Individuals

Higher-income
earners must be wary of the 3.8% surtax
on certain unearned income. The surtax is 3.8% of the lesser of: (1) net
investment income (NII), or (2) the excess of modified adjusted gross income
(MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses,
$125,000 for a married individual filing a separate return and $200,000 in any
other case). As year-end nears, a taxpayer’s approach to minimizing or
eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the
year.

The
0.9% additional Medicare tax also
may require higher-income earners to take year-end actions. It applies to
individuals for whom the sum of their wages received with respect to employment
and their self-employment income is in excess of a threshold amount ($250,000
for joint filers, $125,000 for married couples filing separately and $200,000
in any other case). Employers must withhold the additional Medicare tax from
wages in excess of $200,000 regardless of filing status or other income.
Self-employed persons must take it into account in figuring estimated tax.
There could be situations where an employee may need to have more withheld
toward the end of the year to cover the tax.

Long-term capital gain from sales of
assets held for over one year is taxed at
0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate
generally applies to the excess of long-term capital gain over any short-term
capital loss to the extent that it, when added to regular taxable income, is
not more than the “maximum zero rate amount” (e.g., $77,200 for a
married couple).

Postpone income until 2019 and
accelerate deductions into 2018
if doing so will enable you to claim larger deductions, credits and other tax
breaks for 2018 that are phased out over varying levels of adjusted gross income
(AGI). These include deductible IRA contributions, child tax credits, higher
education tax credits and deductions for student loan interest. Postponing
income also is desirable for those taxpayers who anticipate being in a lower
tax bracket next year due to changed financial circumstances.

If
you believe a Roth IRA is better
than a traditional IRA, consider converting traditional IRA money invested in
beaten-down stocks (or mutual funds) into a Roth IRA in 2018 if eligible to do
so. Keep in mind, however, that such a conversion will increase your AGI for
2018, and possibly reduce tax breaks geared to AGI (or modified AGI).

It
may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that
may be coming your way. This could cut as well as defer your tax.

Beginning
in 2018, many taxpayers who claimed itemized
deductions year after year will no longer be able to do so. That’s because
the basic standard deduction has been increased (to $24,000 for joint filers,
$12,000 for singles, $18,000 for heads of household and $12,000 for marrieds
filing separately), and many itemized deductions have been cut back or
abolished. No more than $10,000 of state and local taxes may be deducted;
miscellaneous itemized deductions (e.g., tax preparation fees) and unreimbursed
employee expenses are no longer deductible; and personal casualty and theft
losses are deductible only if they’re attributable to a federally declared
disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are
met. You can still itemize medical expenses to the extent they exceed 7.5% of
your adjusted gross income, state and local taxes up to $10,000, your
charitable contributions, plus interest deductions on a restricted amount of
qualifying residence debt, but payments of those items won’t save taxes if they
don’t cumulatively exceed the new, higher standard deduction.

Consider
using a credit card to pay deductible
expenses before the end of the year. Doing so will increase your 2018
deductions even if you don’t pay your credit card bill until after the end of
the year.

If
you expect to owe state and local income
taxes when you file your return next year and you will be itemizing in
2018, consider asking your employer to increase withholding of state and local
taxes (or pay estimated tax payments of state and local taxes) before year-end
to pull the deduction of those taxes into 2018. But remember that state and
local tax deductions are limited to $10,000 per year, so this strategy is not a
good one to the extent it causes your 2018 state and local tax payments to
exceed $10,000.

Take required minimum distributions
(RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement
plan). RMDs from IRAs must begin by April 1
of the year following the year you reach age 70-½. (That start date also
applies to company plans, but non-5% company owners who continue working may
defer RMDs until April 1 following the year they retire.) Failure to take a
required withdrawal can result in a penalty of 50% of the amount of the RMD not
withdrawn. Thus, if you turn age 70-½ in 2018, you can delay the first required
distribution to 2019, but if you do, you will have to take a double
distribution in 2019-the amount required for 2018 plus the amount required for
2019. Think twice before delaying 2018 distributions to 2019, as bunching
income into 2019 might push you into a higher tax bracket or have a detrimental
impact on various income tax deductions that are reduced at higher income
levels. However, it could be beneficial to take both distributions in 2019 if
you will be in a substantially lower bracket that year.

Consider
increasing the amount you set aside for next year in your employer’s health flexible spending account (FSA)
if you set aside too little for this year.

If
you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full
year’s worth of deductible HSA contributions for 2018.

Make
gifts sheltered by the annual gift tax
exclusion before the end of the year if doing so may save gift and estate
taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of
an unlimited number of individuals. You can’t carry over unused exclusions from
one year to the next. Such transfers may save family income taxes where
income-earning property is given to family members in lower income tax brackets
who are not subject to the kiddie tax.